As has been widely discussed in industry circles, private equity fundraising began in 2022 with GPs bringing offerings to market faster and with bigger tickets.
Accelerating demand, however, soon met up with a supply problem in the form of overallocated and cash-strapped LPs.
In Buyouts’ December cover story, published this week, HarbourVest managing director Scott Voss discussed the issue, saying a demand-supply imbalance is likely to result in “a consolidation,” where “fundraising cycles will be elongated.” In addition, fund sizes may grow “but they’re not going to grow at the same rate they did.”
Platform extensions or multi-strategy ideas might also be “either consolidated or retired,” he said, as the GP decides, “I’ve gotten too far away from my core.”
“There’s a scenario,” Voss added, “where fundraising in 2022 will still be a record year, just because of how fast we came into 2022, but that has quickly changed. Next year, we could see maybe 50 percent of what we saw in 2021 and 2022 from a fundraising standpoint.”
Buyouts’ Q3 2022 fundraising report, also published this week, reinforced Voss’s message, pointing to a second consecutive quarterly dip in inflows this year. Interestingly, fundraising as of September 30, totaling nearly $410 billion, effectively matched the amount a year earlier, owing to greater inflows in Q3 2022 versus Q3 2021.
On the other hand, fund closings, totaling 736 at the end of September, fell 27 percent over the same period.
Fewer closings have led to larger capital pools. In the first three quarters, the average fund size was $556 million, well up from a year earlier.
What this tells us is some fund sponsors might be faring a little better than others in a tough environment. These are likely to include large, brand-name private equity firms, which are benefiting from the stronger LP focus on existing relationships and re-ups.
Large GPs have been working hard to overcome the effects of the demand-supply imbalance. With US pension systems overallocated to the asset class, many of these firms have used big global platforms to scout around for alternative capital sources to make up the difference.
One of the most cited alternative sources is high-net-worth investors. GPs are eyeing the massive untapped capital of wealthy individuals, who have traditionally been under-represented in private equity. Investing in resources to better access them, several of the largest firms have been successful in growing private wealth’s share of commitments.
For example, as part of record third-quarter fundraising, Blue Owl Capital reported a 300 percent year-over-year increase in private wealth inflows.
Another alternative source is institutions that are not pensions. Last month, KKR co-CEO Scott Nuttall said “we’re spending a lot of time with institutions we’ve never spent time with before.” Among them are LPs with outlooks and circumstances that are quite different from their pension peers, such as insurers and sovereign wealth funds.
Still another is overseas LPs. Blackstone sees foreign capital sources as providing a “terrific balance” at a time when US institutions are cash-constrained, CEO Steve Schwarzman said in October. TPG views things the same way, noting a mix-shift in its LP base, which is “much more international this cycle than it was last cycle,” CFO Jack Weingart said in August.
It is not yet clear whether alternative sources will help large GPs entirely avoid the consolidation identified by HarbourVest’s Voss. Some have already acknowledged the inevitability of extended timelines.
As 2023 promises to be another challenging year for fundraising, GPs of all types and sizes may have to brace for further changes in market dynamics.
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